January 16, 2008
Unhealthy wealth binge tightens the poverty trapPosted in International Economy · 23 comments ·
Have you noticed the Barnardos ad on bus shelters with a picture of a little boy staring out at you under the caption “It’s only poverty, he’ll grow out of it”?
It is one of those ads that make you stop and think. How will he grow out of it? Why do some children, who are born into poverty, escape it while others remain excluded from all the possibilities that a society has to offer? The ad suggests that your charity will help him; I’m not so sure charity alone will do the trick.
The problem of persistent poverty is a real one and an issue that has never been solved. If it had, it would have been eradicated years ago, not just for the good of the individuals afflicted by it, but also for the good of society.
Society is like an engine — if it is firing on all cylinders, it will operate smoothly, demand less attention. If one or two of the cylinders are broken, then the entire machine will suffer.
With that in mind, it is interesting to look at American studies of its underclass and the persistent poverty particularly amongst a large section of the black American population.
In recent years, a yawning gap has emerged between the black middle class and the black underclass, so much so that a recent survey concludes that close to 40pc of American blacks “can no longer be seen as a single race”. This — only 40 years after the unflinching race solidarity of Martin Luther King — is a phenomenal finding.
The easiest and possibly laziest explanation of black or any other group’s poverty is that it is all down to racism, discrimination or some other orchestrated societal bias. This may be a factor but it can’t explain the substantial black middle class.
Many other reasons have been proffered. Four decades ago, Daniel Patrick Moynihan — the Irish American politician who did so much behind the scenes coming up to the Good Friday Agreement — published a revolutionary paper. In it he ventured that the out-of-marriage birth rate and the percentage of black families headed up by single mothers — both at 24pc — might have something to do with poverty. He was dismissed as a bigot at the time.
Now many mainstream thinkers would say that he had a point about family structure as a possible contributory factor.
The New York Times recently carried an article about a study in Harvard by academic Henry Gates which is startling. Gates traces the family tree of 20 successful black Americans including Whoopie Goldberg and Oprah Winfrey. He discovered that 15 out of the 20 descend from freed slaves who had managed to obtain small plots of property by 1920. Back then only 25pc of black Americans owned property.
So if you are prepared to accept that there is a correlation between the success of middle class American blacks and their descending from black property owners, the question you must ask is, had all the freed slaves bought property, what impact would it have had on the fortune of their descendants?
Many have argued that property is wealth and wealth is the springboard for economic development. If you have wealth rather than income you can plan for the future, you can borrow against it and you can pass it on from one generation to the next. Property/wealth acts as a sort of pulley which allows right-minded people to borrow sensibly and thus, winch themselves upwards socially. In short, it accumulates. The idea of property rights and the centrality of property is the basis of Hernando de Soto’s groundbreaking work on persistent poverty in the Third World.
An extension of this idea might go some way to explaining how, after 15 years of a boom, Ireland still has persistent poverty. At the end of a binge, when the average income rose dramatically and the country went from being relatively poor to absolutely rich, how come we still have children below the breadline?
And now that consensus economic forecasts have suddenly admitted that the housing market has ground to a halt, what impact will the economic slowdown have on the prospects of those represented by the little boy staring out of the poster?
Despite all the allegations to the contrary, there has been a serious political effort to address income disparities in Ireland. In fact, in terms of the income gap between rich and poor, Ireland is right in the middle of the EU income league. The salaries of the top 20pc are over four times the average of the salaries of the bottom 20pc. This places Ireland above the UK, Spain, Italy and Greece but below Germany, France, Denmark and Belgium. However, the big problem in Ireland is not income — where all the Government’s efforts have been centered — but wealth. The gap between the wealth of the top 20pc in Ireland and the bottom 20pc is phenomenal. For example, the top 1pc of the country owns 24pc of the wealth and the top 5pc hold 40pc of the country’s wealth, according to Bank of Ireland figures. The poor cannot get their hands on wealth-generating assets.
As a result we have the typical Irish situation of no joined up thinking because one government policy negates the other. What is the point of throwing more and more cash at social welfare, if the core policy of inflating the housing bubble drives house prices out of the reach of the very recipients of social welfare who the Government purports to give a stake in society in the first place? The reason wealth is so important is that, unlike income, it can be used to borrow against, plan and dream of a better future. Borrowed credit allows people to live in the future and it is this ability to plan rather than just exist from day to day which distinguishes income from wealth. Income is spent today; wealth, in contrast, offers a platform for future progress.
This is why the property binge has been so damaging to the fabric of our society. It has put property, possibly the one true comprehensible wealth creating asset, out of the reach of thousands. So it doesn’t matter how much income you transfer in budgets and the like, because without wealth, income disappears like sand through your fingers.
More egregiously, by turning property into a speculative game of Paddy last, the poor Paddies who bought last will now experience the ludicrous situation where land, in one of Europe’s least populated countries, becomes an instrument of gradual indebtedness rather than wealth creation. In this situation, what chance has the little boy in the poster?